Paweł Mazur, interviews

Paweł Mazur: Sometimes winning a tender turns into a nightmare

Litigation Portal: Everyone battles to win a tender. Are they ever sorry afterwards if they win?

Paweł Mazur: Yes, they can be, particularly if the terms of reference for the procurement were defined by the contracting authority in an imprecise or defective way. Art. 29 of the Polish Public Procurement Law requires the contracting authority to define the subject of the procurement unambiguously and exhaustively, but it sometimes happens in practice that suppliers do not have a precise and clear basis for calculating the amount of their bid.

An example would be tenders for installing sewage systems in local communes, which are common now because of the opportunity to obtain EU funding. From the point of view of the commune, the most important thing is to connect a specific number of buildings to the sewer system. But the contracting authority indicates that when calculating the price, the contractor should reflect the length of the installation. At the stage of defining the subject of the procurement, the length can be difficult to estimate, and so the contracting authority defines it roughly. But bidders are required to state a specific price, which in the overwhelming majority of tenders is one of the main criteria, or the main criterion, for selection of bids.

What should a contractor do in this situation?

It is possible to submit an inquiry under the procedure provided for in the Public Procurement Law. The market imposes such strong competition, however, that contractors often learn about the extended scope of the agreement only during the course of performance. Even if a company makes an inquiry, it will receive the answer that the estimated length of the installation is such and such, but what is controlling is the number of buildings to be connected. Later it turns out that the rough length was drastically underestimated by the contracting authority, and it is necessary to design an installation two or three times longer, and the costs of performing the contract are greater than the fixed fee.

If a bidder wants to win the tender, it needs to calculate the price on the basis of the information stated by the contracting authority in the terms of reference for the procurement, the description of the subject of procurement, or the announcement of the procurement. But this entails a serious risk, because if the price as calculated is accepted, and after the tender is decided it is stated in the contract that the fee is a fixed fee within the meaning of Art. 632 §1 of the Civil Code, it will be impossible to increase the fee even if the extent or cost of the work could not be predicted at the time the contract was signed. Winning a tender under those conditions can indeed turn into a nightmare.

What if performing the procurement would bankrupt the contractor?

Civil Code Art. 632 §2 provides an opening, stating that if as a result of an unforeseeable change in relations, performance of the work will threaten the contractor with a gross loss, the court may increase the fixed fee or dissolve the agreement. It is accepted that this section applies to all contracts to perform a specific work, and thus also the type of agreement mentioned in our example. According to the case law, it is also applicable by way of analogy to construction contracts (see e.g. Supreme Court judgments dated 15 May 2007, Case No. V CSK 63/07; and 14 March 2008, Case No. IV CSK 460/07). Resorting to this instrument may prove difficult or impossible for the contractor, however, because contracts concluded under the public procurement procedure—indeed, commercial contracts as well—often contain tight completion deadlines as well as severe penalties for exceeding the deadline.

For this reason a bidder must consider very carefully whether to seek an increase in the fixed fee during the course of performance.

Is it possible to make up the loss after performance?

This is a problematic issue. One could resort to the Civil Code provisions concerning unjust enrichment. In recent years the courts have on several occasions awarded construction companies a fee for additional work that was not covered by the main contract concluded under the Public Procurement Law. They took the view that even if an agreement on additional work was concluded in violation of the Public Procurement Law and was thus invalid, the contractor should be recompensed for the consideration provided under such agreement on the basis of Civil Code Art. 410 §1 in connection with Art. 405 (Supreme Court judgments dated 29 April 2005, Case No. VCK 537/04; 5 December 2006, Case No. II CSK 327/06; 7 November 2007, Case No. II CSK 344/07; and 14 March 2008, Case No. IV CSK 460/07).

Sometimes, however, it is hard to say that there was an agreement to perform additional work. Then the question is whether performance of an unforeseeable increased scope of work can be recompensed under Civil Code Art. 405, on the basis of provisions concerning work done for someone else without a commission to do the work, or under general regulations concerning liability in damages. Consideration of each of these constructions in detail is beyond what we can go into here. In any event, the Polish Supreme Court has yet to address this issue. We may hope that the court will recognise an opportunity to seek such compensation, particularly in a case where the contracting authority clearly misled bidders with respect to the scope of the work necessary to perform the contract properly and achieve its intended purpose.